Speakers here turned what was supposed to be a debate about life settlements into a debate about the meaning of the term “stranger-owned life insurance.”
The panelists appeared here during a session at a life insurance conference organized by LIMRA International, Windsor, Conn.; LOMA, Atlanta; the Society of Actuaries, Schaumburg, Ill.; and the American Counsel of Life Insurers, Washington.
Michael Lovendusky, an ACLI vice president, talked about the STOLI definition included in the Viatical Settlements Model Act developed by the National Association of Insurance Commissioners, Kansas City, Mo. One point he emphasized was the section that restricts life insurance policy owners’ ability to sell policies within 5 years after buying the policies.
“The NAIC definition doesn’t outlaw any transaction,” Lovendusky said. “It just makes you wait 5 years” before settling.
Douglas Head, executive vice president of the Life Insurance Settlement Association, Orlando, Fla., said LISA believes the NAIC definition casts too wide a net and may block legitimate settlement transactions. He also questioned the meaning of specific phrases and terms in the NAIC definition.
“We say we can harpoon the monster–identify what’s wrong–without hurting the consumer,” Head said.
Panelists also talked about the STOLI definition developed by the National Conference of Insurance Legislators, Troy, N.Y.
The NCOIL definition uses different language and restricts policy sales for 2 years after purchase.
“This definition is based on a 100-year-old insurable interest law,” Lovendusky said.
Head said he thinks consumers will be concerned about the effect of the NCOIL definition on their rights. Like the NAIC definition, the NCOIL definition too casts a broad net, Head said.
Head said he does not think an insurable interest solution will work.
Head said the settlement industry prefers the follow approach to defining STOLI:
“Stranger-oriented life insurance” means the procurement of new life insurance by persons or entities that lack insurable interest on the insured and, at policy inception, the person or entity owns or controls the policy or the majority of the death benefit in the policy and the insured or insured’s beneficiaries receive little or none of the proceeds of the death benefits of the policy. Trusts that are created to give the appearance of insurable interest and are used to initiate policies for investors violate in arrangements do not include [defined legitimate life settlements].
“Our view is this [definition] will protect consumer value, give consumers options that they will be able to exercise, and open up the exchange of information” about the transaction, Head said.
Members of the audience peppered the speakers with questions and comments, including the following:
- Why not price the life products appropriately in the first place, so the rates aren’t lapse-supported and it does not matter who is paying for the contract?
- Wouldn’t eliminating lapse-supported pricing eliminate most term life insurance?
- Why arbitrarily limit transactions for 5 years? Why not replace that provision with a 5-year incontestability period?